Accounting For Corporate Entities For International Financial Reporting – Intangible Assets And AASB 138

Impact of IFRS on Australian Financial Reporting

Discuss about the Accounting For Corporate Entities for International Financial Reporting.

The Australian Government’s requirement to adopt International Financial Reporting Standards (IFRS) by the Australian firms for yearly reporting periods starting from 1^st Jan 2005 and onwards has put forth several challenges for financial accountants in the country. Though amendments in accounting standards and introducing new standards is a constant phenomenon, however, the complete espousal of an entirely novel set of accounting standards in the country is without any precedent. Many domains of financial reporting have encountered considerable changes. One domain where sizeable impact was seen is intangible assets. Currently, the reporting system in the nation that addresses the disclosure of intangible assets is primarily overseen by AASB 138 – Intangible Assets, and AASB 136 – Impairment of Assets, that became enforceable from 1^st January 2005 (Griff, 2014). The ensuing paragraphs analyze the recognition and disclosure of intangible assets by Australian entities following the introduction of AASB 138 in 2005.  

The shift to IFRS in Australia has had material implications for the financial reporting and disclosure treatments pertaining to intangible assets. Before the espousal of IFRS, there was no equivalent standard to the newly formed AASB 138. The only relevant standard addressing the question of reporting and accounting for the intangibles was AASB 1013 – Accounting for Goodwill. Together with AASB 1015 – Accounting for the Acquisition of Assets, that obligated business acquisitions to be accounted for through the use of purchase method, AASB 1013 established the model to treat this crucial category of intangible (Australian Government, 2005). Quintessentially it necessitated that goodwill emanating during acquisition should be accounted for in the consolidated balance sheet of the company acquiring the other company and later on be paid off against earnings following the straight line method over a period of not more than twenty years (Dagwell, Wines and Lambert, 2011). Though AASB 1013 widely addressed the suitable treatment of goodwill, there did not exist a holistic framework that established the reporting and accounting requirements pertaining to identifiable intangible assets like mastheads, licenses, patents, brand names and so on. Resultantly, the treatment of such assets was not consistent among Australian companies (ICCA, 2012).

This new standard applied to assets acknowledged as non-monetary and identifiable having no physical existence, including trademarks, research and development, goodwill, brand names and mastheads. As per AASB 138, only those intangible assets which are acquired at cost get recognition, whereas, intangible assets that are generated internally do not get any recognition. The exception to this rule is goodwill which can be accounted for during its acquisition as a component of business merger (Carlin and Finch, 2010). Besides this, intangible assets like in-process R&D obtained through a business merger should be separately recognized from goodwill if they emerge as an outcome of legal or contractual rights or are distinguishable from the business (Steenkamp and Steenkamp, 2016). The AASB 138, deals with defining, recognizing and disclosing intangible assets and mandates financial statements to reveal for every distinctive category of intangible asset: a) useful life, method and rate of amortization, and b) accumulated amortization and the total carrying amount during the start and end of accounting period.

Recognition of Intangible Assets as per AASB 138

AASB 138 has made fundamental changes in the manner in which intangible assets were recognized, accounted and treated in the Australian continent. The IFRS adoption implies that formerly treated intangible assets that were generated internally required being de-recognized. This would also include internally generated mastheads, brand names, goodwill, customer lists, publishing titles and the likes (Cheung, Wright and Evans, 2008).

During the pre-adoption era, the likely impact of IFRS on companies’ reported performance has been frequently discussed in specialized accounting literature. It has been extensively agreed by academics and practitioners that AASB 138 is likely to have a material effect on the financial statements of such companies that would be compelled to derecognize some forms of intangible assets like brand names. Brand names and other such intangible assets may symbolize a considerable fraction of value for the companies, with many asserting that most of their market value pertains to brands (Australian Government, 2004). Ji and Lu (2014) examined the projected impact of the AASB 138 by evaluating the financial reports of a fictitious company. They identified that the fictitious company is likely to witness a fall in its net assets and a rise in its debt to equity ratio. The researchers concluded that one impact of AASB 138 may be a rise in the number of companies facing difficulties in fulfilling their existent debt covenants, and that these companies are likely to make adjustments in their financial records to satisfy the debt covenant mandates required by banks.

AASB 138 allows two grounds for measuring intangible assets post their original recognition. Under the cost model, intangible assets are measured at cost minus accumulated amortization if any and accumulated impairment loss if any. Under the revaluation model, the intangible assets are measured at revalued amount. Para 78 of the standard says that trademarks, patents, mastheads, etc. do not have active markets as each of these assets is unique (Australian Government, 2010). If the revaluation model has to be employed then every asset falling in same category should be measured by the same framework. However, as not many intangible assets possess active market, the applicability of revaluation model will be very rare and hence intangible assets are not likely to be revalued under AASB 138.

In conclusion it can be stated that AASB 138 has been introduced in Australia with the aim to set down the treatment of intangible assets that are not specifically addressed in any other standard. The introduction of IFRS norms in the country has altered the state of affairs pertaining to the treatment of intangibles substantially. A wholesale set of standards governing both unidentifiable and identifiable intangible assets are now present. In many instances, this has led to considerably distinct treatment becoming the rule – the most apparent being the movement from an amortization based treatment of goodwill to an impairment based regime. Australian companies have shown skepticism regarding the advantages that accrue from the adoption of IFRS and AASB 138 in particular. They have expressed concerned regarding de-recognition of intangible assets generated internally and the restrictions to an entity’s capacity to revalue the intangible assets. The reason behind such concern is that AASB 138 necessitates intangible assets having a fixed useful life to be paid off during such useful life and the intangible assets having an imprecise life are subject to the test of impairment.

Journal entries related to issue and forfeiture of share

Journal Entries in the books of Gilt Edge Investment Ltd
				Amount in $
Sr. No.	Date	Particular	Dr. Amount	Cr. Amount
1	28.02.2016	Bank a/c Dr.	1800000
		To Share Application A/c		1800000
		(Being application money received from on shares. (as per working note1) )
2	28.3.2016	Share Application A/c Dr	1800000
		To Share Capital A/c		1000000
		To Share Allotment A/c		800000
		(Being amount received on share application money transferred to share capital account and remaining amount to share allotment account )
3	28.3.2016	Share Allotment A/c Dr.	440000
		To First Call A/c		40000
		To Second Call A/c		40000
		To Share Capital A/c		360000
		(Being the additional amount received on application adjusted against first call and second call and remaining amount paid back)
5	28.03.2016	First Call A/c		40000
		Second Call A/c		40000
		To Share Capital A/c
		(Being amount transferred to capital account)
6	28.3.2016	Preliminary Expenses	20000
		To Banks A/c		20000
		( Being share issue expenditure paid)
7	15.4.2016	Bank A/c Dr.	240000
		To Share Allotment A/c		240000
		(Being amount received by remaining shareholders of allotment)
8	15.05.2016	Share Allotment A/c Dr.	240000
		To Share Capital A/c		240000
		(Being amount transferred to  share capital account)
			154000
9	1.06.2016	Bank A/c Dr.		154000
		To First Call A/c
		(Being amount received by remaining shareholders of allotment)
10	1.06.2016	First Call A/c Dr.	154000
		To Share Capital A/c		154000
		(Being amount transferred to  share capital account)
11	15.06.2016	Share Capital A/c Dr.	48000
		To Forfeiture Account		48000
		(Being shares forfeited and amount transferred to forfeiture account (working note 2))
12	20.06.2016	Bank A/c Dr	48000
		Forfeiture Account Dr.	6000
		To share capital account		54000
		(Being the discount on reissue adjusted against credit balance of share forfeiture account)
13	30.06.2016	Share Allotment A/c Dr	270000
		To Bank A/c		270000
		(Being amount refunded to defaulting shareholders)
14	30.06.2016	Preliminary Expenses A/c Dr.	4000
		To Bank A/c		4000
		(Being expenses paid related to forfieture of shares)

Working Notes

Working Note for ascertaining shares according to pro-rata basis:
Sr. no.	Applicants	No. of shares allocated	Shares
1	100000	100000/500000*400000	80000
2	200000	200000/500000*400000	160000
3	200000	200000/500000*400000	160000

Working Note 1
Calculation of share application money
Sr. no.	Applicants	Amount Paid	Amount
1	100000	100000*5	500000
2	200000	200000*4	800000
3	200000	200000*2.5	500000
			1800000

Working Note 2
Calculation of balance in forfieture account
Sr. no.	Particular	Amount
1	No. of shares forfeited	12000 shares
2	Amount received on share application	30000
3	Amount received on share allotment	18000
	Total amount received	48000

Statement of Profit or Loss and Other Comprehensive Income

Statement of Profit or Loss and Other Comprehensive Income in one statement  and classification of expenses within profit and loss by function
		Note	(Amount in $)
Income
Sales			4,50,000
Expenses
Cost of Sales			2,28,000
Inventory on hand		1,56,000
Gross Profit			5,22,000
Salary & wages			42,000
Other Expenses			9,600
Depreciation		1	82,500
Insurance			19,000
Rent			4,600
Provision of Long Service Leave		8,000
Impairment of accounts receivables		2,000
Profit before Tax			3,54,300
Income Tax Expense (30%)	2	1,06,290
Profit for the year after tax		2,48,010

Notes to Account
Note 1. Depreciation
Particular	Motor Vehicle	Plant & Equipment	Office Furniture
Opening Balance	44000	190000	96000
Depreciation as per books	11000	47500	24000
Closing Balance	33000	142500	72000
Total	82500

Journal Entries
Sr. No.	Date	Particular	Dr. Amount	Cr. Amount
1	30.06.2016	Income Tax expense A/c Dr.	106290
		To Current Tax Liability A/c		106290

(b)

Assets	Carrying Amount	Tax Base	Taxable Temprory Difference	Deductible Temporary Differences
Accounts receivable (net)	43000		45000	2000
Motor Vehicle	33000		28000		5000
Plant & Equipment	142500		136000		7000
Office & Furniture	72000		51000		21000
Provision for LSL	8000		0	8000
Insurance	13200		13200	13200
Rent	13000	0			13000
Total Temporary Difference				23200	46000
Deferred tax liability 30%				6960	13800
Deferred tax asset 30%
Beginning balances
Increase/(Decrease)				6960	13800

Depreciation as per taxation norms
Particular	Motor Vehicle	Plant & Equipment	Office Furniture
Opening Balance	44000	190000	96000
Depreciation as per books	16000	54000	45000
Closing Balance	28000	136000	51000
Total	115000

Journal Entry
Sr. No.	Date	Particular	Dr. Amount	Cr. Amount
1	30.06.2016	Deferred Tax Asset A/c Dr.	6960
		Provision for Tax Expenses A/c Dr	113130
		To Deferred Tax Liability A/c		13800
		To Income Tax Payable		106290

References

Australian Government. (2004). Disclosing the Impacts of Adopting Australian Equivalents to International Financial Reporting Standards. [pdf]. Available through: <https://www.aasb.gov.au/admin/file/content102/c3/AASB1047_04-04.pdf>. [Accessed on 6^th October 2016].

Australian Government. (2005). Consolidated Financial Reports in relation to Pre-Date-of-Transition Stapling Arrangements. [pdf]. Available through: <https://www.aasb.gov.au/admin/file/content105/c9/INT1013_04-05.pdf>. [Accessed on 6^th October 2016].

Australian Government. (2010). Intangible Assets. [pdf]. Available through: <https://www.aasb.gov.au/admin/file/content102/c3/AASB138_07-04_ERDRjun10_07-09.pdf>. [Accessed on 6^th October 2016].

Carlin, M. T. and Finch, F. (2010). Resisting compliance with IFRS goodwill accounting and reporting disclosures: Evidence from Australia. Journal of Accounting & Organizational Change, Vol. 6 Iss: 2, pp.260 – 280.

Cheung, E., Wright, S. and Evans, E. (2008). The adoption of IFRS in Australia: The case of AASB 138 (IAS 38) intangible assets. Australian Accounting Review, Vol. 18, Iss: 3, pp. 248-256.

Dagwell, R., Wines, G. and Lambert, C. (2011). Corporate Accounting in Australia. Pearson Higher Education AU.

Deegan, C. (2014). Financial Accounting Theory. McGraw Hill Education AU.

Griff, M. (2014). Professional Accounting Essays and Assignments. Lulu Press.

ICCA. (2012). Chartered Accountants Financial Reporting Handbook. John Wiley & Sons.

Ji, X. and Lu, W. (2014). The value relevance and reliability of intangible assets: Evidence from Australia before and after adopting IFRS. Asian Review of Accounting, Vol. 22 Iss: 3, pp.182 – 216.

Steenkamp, N. and Steenkamp, S. (2016). AASB 138: catalyst for managerial decisions reducing R&D spending? Journal of Financial Reporting and Accounting, Vol. 14, Iss: 1, pp.116 – 130.